Do you hate losing money on Amazon?

I know I do!

After all, I started selling on Amazon FBA in order to make money! However, back when I started selling on Amazon, I ignored one important aspect of being a successful business owner: proper Amazon inventory management. This neglect ended up costing me thousands of dollars in storage fees, opportunity costs, and missed opportunities!

Fortunately, I’ve since learned from my mistakes. After a year of hard work, I got things turned around and now I want to share with you some of the hacks I’ve learned to keep profits up and keep fees and lost opportunity costs down.

Amazon inventory management: why you need to master it today.

If there’s one area that a lot of new Amazon FBA sellers aren’t great at, it’s gotta be Amazon inventory management.

Let’s take a quick look at why one of the keys to success with your Amazon FBA business is proper Amazon inventory management.

3 Reasons Why Proper Amazon Inventory Management is Important

Amazon sellers probably hate losing money nearly as much as they love making it. And while it may not seem like Amazon inventory management is a big deal, it can actually end up costing you hundreds–even thousands!–of dollars on Amazon.

Proper Amazon Inventory Management helps you…

1 – Prevent stock-outs.

Running out of stock on Amazon can cost you a ton of money for a variety of reasons. First, and most obvious: if your product isn’t live on Amazon, it’s not selling. Next, Amazon hijackers can steal your listing and profit on your neglect–it even happened to us! And finally, if your listing is dead, your ranking suffers. Running out of stock on Amazon is pretty much like hitting the reset button on your entire business! Avoid it at all costs!

2 – Avoids costly long-term storage fees.

On the other end of the Amazon Inventory Management spectrum is having too much inventory. Amazon used to be pretty lax with its sellers on how much inventory they could keep in the fulfillment centers. However, starting in less than a month, Amazon is cracking down on junky, slow-moving inventory. They’re introducing new long-term storage fees, and if you aren’t ready for them, you could easily lose hundreds (or thousands!) of dollars in a single day.

Read about the changes here: Amazon storage fees are changing. Here’s why you should be worried…

3 – Increases your Amazon Fulfillment Center storage space allowance.

Finally, you probably want to grow your business with Amazon right? But did you know that Amazon limits the amount of inventory that you can keep at their fulfillment centers? That’s right. If you’re not employing proper Amazon inventory management practices, you could find yourself blocked from having new products at Amazon. That could really put a damper on your growth potential. So keep up with your Index Performance Score!

How can I perform proper Amazon inventory management?

Pay attention to your metrics! Fortunately, Amazon Seller Central offers sellers a scorecard to let you know how you’re doing with your Amazon inventory management practices: the Inventory Performance Index. This number is found on the Amazon Seller Central Inventory Planning Widget.

What is the Amazon Seller Central Inventory Planning widget?

If you log in to Amazon Seller Central and scroll down the page, just below your Sales Summary and List Globally widgets (aka “the fun ones”) is your Inventory Planning widget. There’s a ton of super important information on this tool, too.

Here’s what that widget includes:

Inventory Performance Index – Amazon’s score for how well you are managing your Amazon inventory (more on this below).

Days in inventory – how old your stock is on average.

SKUs to restock today – which products are currently you out of?

Excess units – which products do you need to remove from fulfillment centers?

Notifications – tips from Amazon to help you with your inventory management.

What is the Amazon Inventory Performance Index Score?

Amazon’s Inventory Performance Index Score (IPI) is Amazon’s metric that “grades” you on how well you’re doing with your inventory at Amazon. The IPI offers a number from 0 – 1000. Ultimately, how well you do on the IPI determines how much storage space you’re awarded at Amazon.

Individual selling accounts have the same storage limit, which does not increase or decrease.

Professional seller accounts may or may not have storage limits, depending on the following criteria:

Sellers who maintain an Inventory Performance Index of 350 or greater will have unlimited storage for standard-size, oversize, apparel, and footwear items.

Sellers with an Inventory Performance Index less than 350 six weeks before the end of a quarter will be notified of their potential storage limits. If their score is still less than 350 on the final day of the quarter, the limits will apply for the next quarter.

Sellers without an Inventory Performance Index will receive default storage limits until enough data is collected to generate a score.

How do I keep my Inventory Performance Score above 350?

Amazon takes a look at four major influencing factors that build your IPI. The key to keeping your IPI above 350 lies within these factors. But what are they?

The Top 4 influencing Factors for the Inventory Performance Index

Excess Inventory – do you have too much inventory in Amazon fulfillment centers?

Sell-Through Rate – is your inventory selling well in relation to the amount of inventory you keep in stock?

Stranded Inventory – do you have any unsellable units that are stuck in Amazon fulfillment centers?

In-stock Rate – do you frequently run out of stock of popular products?

Getting these influencing factors under control will boost your IPI. To address any potential issues you might have with these influencing factors, simply login to your Seller Central page. Scroll down to the Inventory Planning widget and click on your score. Your Inventory Performance page will open up.

First, Amazon will show you how each influencing factor is doing by itself. Scrolling down, it will give you options to address any outstanding issues you have with your inventory.

What is excess inventory?

The Excess units quantity is the number of units for which the cost of holding your inventory would likely be more than the cost of taking action (such as reducing prices to increase sell-through or removing excess units). This value is based on product demand and your costs (including fees, unit costs, and cost of capital inputs).

How do I handle excess inventory?

First, you can sell it. That probably sounds easier said than done, right? Fortunately, Amazon arms you with a few tools to point you in the right direction. Amazon PPC can help you sell more inventory. Coupons and promotional giveaways can help, too, especially when combined with a giveaway site like Jump Send. And don’t forget that you simply reduce the overall sales price!

The other method of handling excess inventory is through Amazon’s removal services. In fact, there are three ways to remove inventory: disposal, ship-to address removal, and liquidation. I cover these removal methods in greater detail in this article from Fetcher: Amazon fees are changing. Why you should be worried…

What is the sell-through rate?

Your Amazon sell-through rate is a ratio of your sales divided by your inventory units average. So if, for example, you carried an average of 300 units in your inventory over the last 90 days and you sold 250 units during that period, your sell-through rate would be 0.83. Amazon considers anything below a 0 (poor). To stay “in the green”, you’ll want a sell-through rate of at least 2.0.

How do I improve my sell-through rate?

The methods of improving your sell-through rate are similar to those for handling excess units. First, try to increase your sales. But if you feel that you’ve plateaued there and know roughly what your monthly sales will be, try to keep your Amazon FBA inventory levels at roughly half of what your 90-day sales estimates would be. So, if your sales are normally 200 units per month, you should keep no more than 300 units at Amazon at any given time (600 units in sales/300 average inventory = 2.0 sell-through rate).

If you already have too much inventory at Amazon, go ahead and remove it now. Sure, there’s an associated cost. But a few fees now are way better than when Amazon hits you with crazy high long-term storage fees later. Or even losing your ability to carry new products!

What is stranded inventory?

Stranded inventory refers to FBA inventory in fulfillment centers that does not have an associated active offer, and as a result, is not available for purchase by customers on Amazon. This often happens to inventory that’s damaged, returned, or just lost in Amazon fulfillment center limbo.

One important thing to know: You cannot send additional units of a product to Amazon when inventory is stranded! If you have stranded inventory, you cannot ship additional units of the product that is stranded to an Amazon fulfillment center.

How to deal with stranded inventory?

Amazon has four methods of dealing with stranded inventory. The method of dealing with the stranded inventory depends on the reason it is stranded in the first place.

Here’s the four methods:

Change the listing to Fulfilled by Amazon. This happens when your product is in a Fulfillment Center, but (for whatever reason) listed as a Fulfilled-by-Merchant product.

Create a new listing. This is if the product was sent to Amazon but didn’t have a listing to begin with. You’ll have to create a listing for that product.

Create removal order. This is if the product is totally unfulfillable (damaged or a return).

Relist. Finally, if you simply need to relist the product because you or Amazon closed it, all you need to do is click this button and it should pop back up.

What is the FBA in-stock rate?

Your FBA in-stock rate is the percentage of time your replenishable FBA products have been in stock for the last 30 days, weighted by the number of units sold in the last 60 days. Basically, this is Amazon telling you that you need to keep popular products in stock. As I mentioned before, stock-outs can seriously damage your Amazon FBA product listing. Therefore, it’s imperative you stay on top of it.

How do I improve my FBA in-stock rate?

Obviously, you need to stay in stock! Of course, when you’re dealing with overseas suppliers, that’s not the easiest thing in the world to do. In fact, I’d go as far to say that this is probably the hardest one to stay on top of. Even Jungle Scout’s products have gone out of stock!

Here’s a few tips for keeping in stock:

Always try to keep at least three months worth of sales in stock. Of course, you won’t be able to keep all of your stock at Amazon, not if you want a good sell-through ratio. So you’ll have to keep a portion of your stock at a distribution center (personally, I use my garage). If you dip below three months worth of sales in stock, place an order with your supplier right away. That way, when you’re close to running out of your current inventory, your new inventory should arrive.

Follow Amazon’s suggestions for when your inventory is getting low. However, Amazon kinda stinks at predicting when to place orders. Amazon notifies me of low inventory when my inventory is at the 14-days-left mark. With lead times and shipping times of 45-60 days, this means you’re going to experience a stock out. Uh, thanks for nothing, Amazon!

Use Forecastly’s inventory management software to stay on top of your stock. Forecastly knows your lead times, shipping times, and exactly how much inventory you need to keep in stock to ensure that you don’t run out. It’s like a crystal ball for your business. And the best part? We offer a 14-day free trial! So, if you don’t like it, you don’t have to keep it.

Proper Amazon Inventory Management = Amazon FBA Success

Now you totally understand how to do proper Amazon inventory management. Know this: it’s not something you have to think about constantly. But definitely make sure that you review your Inventory Planning Widget notifications regularly and you’re using Forecastly to prevent costly stock-outs.

If you’ve got any more questions about proper Amazon inventory management, let me know in the comments!